Stacks of U.S. one-dollar bills are arranged for a photograph in New York. (Photographer: Scott Eells/Bloomberg)

How a $139 Billion Fund Is Trading the Trade War

(Bloomberg) -- In a bid to beat the trade war, a $139 billion Australian investment manager is using 30-year Treasuries as its weapon of choice.

The ultra-long bonds are seen as a hedge to protect the portfolios of AMP Capital Investors Ltd. against the risks stemming from the U.S.-China trade frictions and less-synchronized global growth, according to Ilan Dekell, the head of macro for global fixed income at the asset manager.

“Six weeks ago, we started increasing our duration in the 30-year part of the curve,” Sydney-based Dekell said in an interview in Sydney. “It gives us a bit of protection. I can’t forecast the trade war.”

AMP Capital is also betting on a long dollar position against a basket of emerging-market currencies that have been sold off amid tightening liquidity in the greenback, he said.

How a $139 Billion Fund Is Trading the Trade War

The strategy means AMP Capital join the ranks of fund managers such as Goldman Sachs Asset Management and QIC Ltd. that are looking for protection as the trade war between the world’s two largest economies escalates. Pacific Investment Management Co. sees value in safe haven Treasuries “if things get worse,” while Morgan Stanley has called a peak in the 10-year U.S. yield as trade concerns and a stronger dollar curb its advance.

The yield on U.S. government bonds maturing in 30 years was at 2.93 percent Friday, down from 3.26 percent mid-May, which was the highest level since September 2014. The S&P 30-Year U.S. Treasury Bond Futures Total Return Index has risen about 4 percent in the period.

Best Behind

“The best is probably behind us,” Dekell said Thursday, alluding to the environment of rising global growth and benign inflation seen earlier this year. “The trade war adds to our concerns -- our book overall is very conservative.”

Signs of growth peaking were underscored by China’s economic data on Monday. The world’s second-biggest economy saw its gross domestic product gain 6.7 percent in the latest quarter, compared with 6.8 percent in the previous three months. Industrial output in June missed estimates.

At the other end of the maturity spectrum, AMP Capital has been shorting two-year government notes as it sees the Federal Reserve raising interest rates two more times this year and thrice in 2019.

“We held our shorts in the two-year part of the curve” because of the rate hikes, said Dekell. “We’ve become more concerned and conservative about tightening conditions,” and “we think the policy bias is higher,” he said.

Elsewhere, Dekell sees further weakness in emerging-market assets, particularly in countries with current-account deficits such as Indonesia and India. Closer to home, he favors shorter-dated Australian government debt as he expects the Reserve Bank of Australia to keep rates on hold until 2020.

Dekell, who predicted in February that the Australian dollar will fall to 73 U.S. cents before the end of the year, says the currency is currently trading at “fair value.” The Aussie has declined almost 5 percent against the dollar in 2018, and was at 74.37 cents at 3:51 p.m. in Sydney.

“If you go down the route of trade wars and people getting concerned about China growth, then that would put downward pressure on the Aussie,” he said.

©2018 Bloomberg L.P.